Focus remains on DOE inventory data and FOMC Minutes

Yesterday’s market action

The Dollar strength theme continued yesterday, initially on leaked comments from ECB’s Coeure, gave at a private function the evening prior, and then from the US Building Permits and Housing starts coming in ahead of expectations. UK CPI, released at 09:30, showed the UK slipping into deflation, and while the Eurozone CPI flat-lined in April, the first time that prices hadn’t dropped in the Euro are in six months, it wasn’t enough upset the broad dollar strength on the day. Equities struggled to gain any momentum throughout the day and crude traded lower throughout the day, lifting only towards and after the API inventories data was released, showing a further drawdown in the US of 5.2million barrels.

Today’s View

The Bank of England meeting minutes released at 09:30, demonstrated the MPC’s dedication to keeping UK interest rates at historic lows, with members voting 9-0 once again. Interestingly, two members on the committee stated that their decision was finely balanced between hiking rates and keeping them on hold. The significance of these minutes is mitigated by yesterday’s CPI data, which showed UK inflation pushing into deflationary territory and surely negating any hawkish sentiments at the previous meeting.

This afternoon is all about crude, with the release of the DOE inventory data. WTI has continued to creep slightly higher this morning in advance of the release, and expectations for another drawdown will be increased in the wake of the API release last night showing a considerable drawdown. These occasions have been tricky to trade, with the commodity rallying sharply in recent months following 14 consecutive inventory builds whereas the past two weeks prices have traded lower on the day when crude inventories were shown to have decreased. Expect fairly cautious trading across major asset classes ahead of the Fed meeting minutes release at 19:00. The equity bears will have been buoyed by the S&P’s failure to push higher on the day, suggesting a period of consolidation could be ahead. The biggest threat to equities at present remains the prospect of rate hikes and heightened volatility in the bond markets. With that in mind, the strong reversal in US t notes yesterday was particularly ominous and a break below the low of the 12th May would certainly re-ignite rate hike fears and exert downward pressure on equities.